June 30 (BusinessWire) – Allied Farmers Ltd., which took on the Hanover and United loan books in a debt-for-equity swap last year, has accused Hanover Finance of breaching their agreement and will take legal action against the failed finance vehicle of …

Allied accuses Hanover of breaching agreement, takes legal action

By Paul McBeth

June 30 (BusinessWire) – Allied Farmers Ltd., which took on the Hanover and United loan books in a debt-for-equity swap last year, has accused Hanover Finance of breaching their agreement and will take legal action against the failed finance vehicle of Mark Hotchin and Eric Watson.

Allied claims Hanover failed to administer its assets in the usual and ordinary course, didn’t consult in relation to proposed transactions and didn’t dispose of finance assets without getting prior consent, it said in a statement to the NZX. Hanover also failed to enforce the terms of any contract assumed by Allied, not to enter any abnormal or unusual transaction which adversely impacts on assets and to apply cash generated after June 30 last year only to specified costs or to pay it to Allied, it said.

The claims, which Allied says exceed $5 million, mean the finance company won’t pay Hanover $5 million today under the terms of the agreement, nor will it meet any future obligations. That comes after Allied wrote down the value of the loan books by about two-thirds to $124 million. In 2008, the Hanover and United assets were valued at $516.6 million.

“The claims relate to a number of transactions where we have been unable to ascertain any sufficient commercial rationale or benefit to Hanover, including the release of personal guarantees and the sale of assets at what Allied considers to be less than market value,” managing director Rob Alloway said in a statement. “It appears to Allied Farmers that the overriding reason that Hanover entered into such transactions was in order to generate cash funds required to meet its repayment obligations to investors under the moratorium agreement.”

Hotchin and Watson injected $76 million in cash and property into Hanover when it started to hit the skids, and offered a guarantee of up to $20 million if required. Before it put forward the Allied bid to investors, the firm posted a $102 million loss, and said a best-case scenario for debenture holders would be a 70% return of their principal after the deferred repayment plan stalled.

Allied’s Alloway said the way Hanover generated cash to meet its moratorium obligations “had the effect of avoiding Hanover having to utilise the $10 million held in a solicitor’s trust account for the purpose of protecting the initial payments under the moratorium.”

If the funds under trust had been used, Hotchin and Watson, as shareholders, would’ve had to top it up to $10 million to underpin the following year’s payment plan.

Hotchin, who fronted the campaign to rally investor support for the Allied plan and took most of the flak for the firm’s failure, has been reportedly staying in Hawaii and is trying to sell his $30 million property on Paritai Drive in Auckland.

Allied is also looking at further claims against Hanover directors and management, though it declined to comment further as the matters will likely be part of legal proceedings.